To appease its critics, the provincial government has de-emphasized utility-scale generation.
The Ontario electricity market is largely ruled by ministerial directives. One of the most important of these directives was issued by the Minister of Energy on June 12 to the Ontario Power Authority (OPA) and substantially revamps Ontario’s feed-in tariff (FIT) program, if revamping is a suitable word for a significant downsizing of the program . The directive – while largely unhelpful to the wind industry in Ontario is economically astute and politically deft.
It should be noted that these comments require an understanding of the current political climate in Ontario. For readers who are unfamiliar with Ontario politics and its relationship to the procurement of renewable energy, a brief primer is useful.
The present government is a Liberal Party minority. The Liberal government is four seats short of a majority and, therefore, must count on the support of one of the opposition parties to pass major legislation. A failure to pass a major piece of legislation would be equivalent to a non-confidence motion and likely result in a general election that would not otherwise be due until 2015.
The two opposition parties to the Liberals are the Progressive Conservative Party, which has publicly stated it would scrap the FIT program, and the New Democratic Party (NDP). which is generally supportive of renewable energy but views electricity as a public good that should be owned and operated in the public interest by one of the provincially owned utilities.
The directive must be read in the context of the Liberal minority government’s need to obtain the support of the NDP if it is to continue in office. The situation is further exacerbated by a pre-election decision to relocate two gas plants in what was widely regarded as a move to save two Liberal seats. The cost of the relocation appears to be understated; the provincial auditor has been called in; documents and emails requested by a legislative committee have been slow to surface or have been deleted – all embarrassing and potentially fatal issues to a minority government.
The principal objectives of the directive, addressed to OPA CEO Colin Andersen, are briefly set out in its first paragraph. These objectives include yearly procurements of 150 MW for Small FIT projects and 50 MW for microFIT projects over the next four years up to and including 2017; repla ci ng the FIT for large-scale renewable projects with a competitive procurement process; and the opportunity for municipalities and public-sector entities to participate in the renewables procurement programs.
The general thrust of these objectives is obvious. By concentrating on Small and microFIT projects, the Ministry of Energy appears to b e acknowledging that demand for electricity is expected to be flat or increase slightly in the coming years; thus, no large-scale procurement will be required in the immediate future. This hiatus in procurement should temper the increase in the Global Adjustment. The Global Adjustment is the account where, among other things, the difference between the higher, fixed-price FIT contracts and the usually lower Hourly Ontario Energy Price is recorded before being passed on to the ultimate consumer.
This moderating of the effects of any increase in power prices at the retail level may limit or avoid politically damaging consequences. The emphasis on Small and microFIT projects with priority for projects that have municipal and Aboriginal support, together with a broadly defined public-sector entity ownership preference, appears designed to win more widespread support for the FIT program, as well as counter the resentment of many municipalities at being shut out of the decision-making process on renewable projects in their jurisdictions. The apparent rationale for deferring large-scale projects and encouraging small-scale ones that have public participation and support is both economically and politically defensible.
Large renewable projects are defined as projects that are greater than Small FIT projects. A Small FIT project is generally one that is a capacity-allocation exempt, embedded generation facility with a nameplate capacity greater than 10 kW and up to 500 kW. The threshold for being a large renewable project is therefore relatively low. Anything that qualifies as a large renewable project is to be subject to a competitive bidding process. The application of a such a process seems to be a form of overkill and may be unnecessarily complex administratively.
To be fair, the previous FIT process did not guarantee the most economical price to the Ontario ratepayer. While the FIT 1.0 and 2.0 pricing regimes were apparently designed to produce a target rate of return to developers of between 12% and 13% on an after-tax, levered basis, large corporations that qualified as principal business corporations for Canadian income tax purposes could make early use of accelerated depreciation with significantly enhanced rates of return.
Further, these corporations could also finance on a portfolio basis. In contrast, private developers usually had to resort to non-recourse project financing at rates considerably higher than the public corporations that could issue debt securities based on the strength of their balance sheets. Lastly, these public corporations had considerable clout when dealing with equipment suppliers, particularly wind turbine manufacturers, because these public corporations – generally, utilities – could use their purchasing power in other business areas to get more reasonable pricing from suppliers. A competitive bidding process might capture for the benefit of the ratepayer some of the advantages that accrue to the larger corporate proponents.
One group of developers that would likely suffer in a competitive bidding process is that of the small private developer that would not have the economies of scale the principal business corporations enjoy. Unless some provision is made for these developers, they may disappear from the Ontario marketplace. Many possible solutions to the problem have been put forward, including separate requests for proposals for projects 10 MW and under or an expansion of the FIT program from 500 kW to 10 MW.
Another wild card in the directive gives Ontario Power Generation Inc. (OPG), the provincially owned generator that supplies about 65o/o of the power produced in the province, the right to participate in future renewable procurements.
Previously, OPG was limited to developing waterpower projects of 50 MW or greater. The Power Workers’ Union, which represents most of the OPG workforce, has for years been energetically campaigning for OPG to be allowed to participate in the development and ownership of renewables. The major transmission lines in the province were primarily built to service utility facilities. OPG, as well, has all of the attributes of a principal business corporation, including the ability to make use of the accelerated depreciation because it pays taxes to the province as if it were a taxable corporation. Will the presence of the utility in the competitive bidding process actually diminish competition by causing other potential bidders to leave the market because of its perceived advantages?
What all of this means to the wind industry in Ontario can be summed up as follows:
- As long as the Small FIT cap remains at 500 kW, the FIT program is no longer accessible to wind developers, except for those using small-scale turbines, which to date has not been a highly active market segment in the province.
- Any competitive bidding process will probably be dominated by the major utilities, including OPG, likely with municipal and Aboriginal equity participation.
- Given the level of flat or slowly increasing demand, already-contracted wind and large-scale procurement of wind will probably not occur until late 2015, with anticipated commissioning dates for mid-to-late 2017 to coincide with the Darlington Nuclear Station refurbishment.
- The greater latitude given to municipalities in the location and siting of wind farms may make permitting more difficult for developers and preclude the siting of wind farms in municipalities that have a strong anti-wind bias.
One commendable feature of the revised FIT program is the four-year procurement commitment for Small and microFIT installations. A similar schedule for large renewable procurements, however tentative, would give developers, manufacturers and service providers some confidence that a long-term market for wind exists in the province.
In light of flat demand, the directive is an economically realistic document. It is also a highly political one. As the late Tip O’Neill, long-time speaker of the U.S. House of Representatives, once famously said, “All politics is local.” In Ontario, it could also be said that all electricity is political.
Perhaps a better question might be, “Should it be so?”
Andrew Chant is managing director of renewable energy at Toronto-based consultancy Ortech Power. He can be reached at (905) 822-4120 or email@example.com.
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